Transfer pricing audit adjustments and penalties may surprise middle-market companies that are not prepared

Private Company Services Tax Insight

Changes in the IRS’s structure, staffing practices, and audit procedures, coupled with the international expansion of many businesses, have led to an increase in audits of middle-market companies (i.e., those reporting less than $10 billion in assets), especially in the area of transfer pricing. Some of the transfer pricing issues in the spotlight for middle-market companies include cross-border intercompany financial transactions, management services, and intangibles transfers.

Companies with significant intercompany transactions like these should make sure they have (1) identified and categorized all of their intercompany transactions, (2) established and properly applied acceptable IRS ‘arm’s-length’ pricing policies, and (3) prepared a contemporaneous transfer pricing report (TP report) for use upon audit.

A principled and thoughtful TP report that is in compliance with the applicable regulations will help companies bolster their positions upon audit and may help them avoid penalties.

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